There are a lot of misconceptions regarding commercial finance, in this short page we hope to go over the commercial finance process in depth, so that you can understand what factors are considered in underwriting process.
Commercial Lending vs Personal Lending
1. Commercial Lending Rates are higher
People often use personal borrowing rates as a barometer to judge commercial lending rates, but this isn’t an apples to oranges comparison. Commercial loans have a higher risk than your average car loan. Consequently, commercial lending interest rates are higher than personal interest rates.
2. Rates are based on risk
While personal lending can be relatively simple and based on fewer factors, commercial lending is based on multiple risk-related factors. These factors include: credit score, time in business, bank statements, home ownership, and the age/condition of the equipment being financed.
Return on Investment (ROI) vs Interest Rate
When seeking a commercial loan, it’s important to consider the additional revenue you will generate from the equipment that is being financed.
Here’s a great example:
Business A has a monthly equipment payment of $1,000. Each month the equipment generates $10,000 in revenue. His interest rate is 6%
Business B has a monthly equipment payment of $1,000. Each month the equipment generates $10,000 in revenue. His interest rate is 20%
Both businesses generate $10 per $1 invested. Are both loans a good investment for the respective businesses? Absolutely! The difference lies in the risk the bank saw between the two businesses.
In conclusion, the interest rate isn’t the only thing to consider when determining whether a commercial loan makes sense for a business. A commercial loan can have a high interest rate but still make financial sense for a business if it yields a good return on investment.